Basic, lesson 1 of 3
Revenue, ARR, bookings, and cash
One signed contract shows up as four different numbers. Knowing which is which is the first test of whether a founder's revenue line means what it says.
9 min, 3 checks
1Four numbers from one contract
When a customer signs, a software company can point to bookings (the value of what was signed), revenue (what has been earned so far under accounting rules), cash (what has actually been collected), and ARR (annual recurring revenue, the yearly value of the subscription running today). They move at different times, and a deck that blurs them usually blurs them in the founder's favor.
| Number | What it measures | On January 31 |
|---|---|---|
| Bookings (TCV) | Total value signed | $240K |
| ARR | Yearly value of the live subscription | $120K |
| Revenue recognized | Earned so far, spread over the service period | $10K |
| Cash collected | Invoiced and paid | $120K |
The gap between cash and revenue sits on the balance sheet as deferred revenue: $120K collected minus $10K earned leaves $110K the company still owes in service. Annual prepayment is a gift to a startup's runway, but it is not extra revenue.
Check 1
A customer signs a two year contract at $60K a year, billed annually up front, on July 1. How much revenue is recognized in that calendar year, in thousands?
2What belongs in ARR
ARR = recurring MRR x 12
Recurring means subscription fees the customer pays every month or year under contract. One time fees do not count.
Founders stretch ARR in predictable ways: annualizing a strong month of usage fees, counting one time implementation or setup fees, counting contracts that are signed but not yet live (some call that CARR, contracted ARR, and it should be labeled as such), and counting pilots that can be cancelled at will. Ask for MRR by customer, split into subscription, usage, and one time.
Worked example
Cleaning up Larkspur's ARR
- 1Reported MRR: $400K, so the deck says $4.8M ARR.
- 2$50K of the MRR is one time onboarding fees. Recurring MRR: 400 - 50 = $350K.
- 3Clean ARR: 350 x 12 = $4.2M.
- 4Another $40K of MRR is usage overage from one customer's seasonal spike. Treat it as recurring only if it repeats.
$4.2M of clean ARR, 12.5% below the headline, and possibly $3.72M if the overage does not recur.
Check 2
Reported MRR is $500K, of which $60K is one time onboarding fees. What is ARR, in millions?
Check 3
A company signs a three year contract at $300K a year, billed annually. The day it is signed, which number rises by $900K?
Terms in this lesson: ARR, Balance sheet, Deferred revenue, Burn rate.
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